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Come with the wind: Taiwan leads Asia’s shift to a low-carbon economy

Taiwan's first-ever offshore wind farm is garnering great interest in green energy and paves the way for similar projects across Asia Pacific. What is driving demand, what sort of financing is required and how do they become commercially viable?

The energy transition is real. Driven by
fast-changing policy, market and consumer dynamics, it is creating immense
opportunities for both companies and investors willing to adapt – but imminent
risks for those that are not.

In June 2018, Taiwan's Formosa 1 Wind Power
Co., Ltd, was the first-ever project financing for an offshore wind farm in
Asia Pacific. A landmark 128MW development, it marks a major milestone for the
country, which is increasingly turning to renewables for its energy needs.

"The economic and social opportunities afforded by offshore wind farms are grabbing the attention of financial institutions and investors like never before."

Bruce Weller, Head of Power and Project Finance, Asia Pacific, BNP Paribas

The transaction involved 11 international and
Taiwanese banks, along with Denmark's Export Credit Agency EKF, with funding in
New Taiwan Dollar (TWD) – another first. BNP Paribas acted as sole financial
advisor, mandated lead arranger, hedge coordinator and account bank.

According
to Bruce Weller, Head of Power and Project Finance for BNP Paribas in Asia
Pacific, the economic and social opportunities afforded by offshore wind farms
are grabbing the
attention of financial institutions and
investors like never before. "This milestone will pave the way for future
transactions across the region," he said.

Regional interest

Outside Greater China, offshore wind farms
are more unusual. However, this is set to change: recent studies pointed to a
potential 20-fold increase in regional offshore wind power capacity, reaching 43GW by 2027. [2]

While largely driven by China, with little
or no opportunity for foreign investors to take part, Taiwan, followed by
Japan, South Korea, India and Vietnam, are all expected to play a prominent role [3].

"Renewables, and specifically offshore wind
power, are an economic and political priority for Taiwan, which imports most of
its energy needs," observed Olivier Rousselet, Head of Territory for Taiwan at
BNP Paribas. The government wants to boost the share of renewables in Taiwan's
power production to 20% by 2025, from less than 5% in 2017.

For the region as whole, the projected
growth of offshore wind power will depend on price competitiveness.
Creating an investor-friendly environment helps, as has been the case for
Taiwan.

Nonetheless, there remain challenges for
offshore wind power in Asia Pacific. A lack of logistical support and
insufficient government backing will hinder competitiveness [4].

"Renewables, and specifically offshore wind power, are an economic and political priority for Taiwan, which imports most of its energy needs"

Olivier Rousselet, Head of Territory for Taiwan, BNP Paribas

Geography and climate can also be key. In
this regard, Taiwan is fortunate: the Taiwan Strait enjoys near-ideal
conditions for offshore wind generation, with shallow coastal waters and
consistent high winds year-round. Japan, South Korea and Vietnam have similarly
promising conditions – but many countries do not, which will limit the appeal
of offshore wind power development.

Keys for Success

A number of factors crucial to Formosa 1's
success highlight the foundations necessary for other regional projects.

Regulation: Taiwan was the first country to put in place a framework allowing
foreign investment in this sector. Japan recently followed suit [5], while South Korea and Vietnam are also looking to open their
markets.

Political vision: Taiwan was among the
first Asia Pacific countries to grasp the importance of moving away from
carbon-intensive energy production. Recognising the development cost for
renewables projects, its government created legally-binding financial incentives – for example,
state-owned Taiwan Power is committed to buying the output of Formosa 1 for 20
years with guaranteed feed-in tariffs [6].

Overcoming financial challenges: BNP
Paribas was able to provide end-to-end financing for Formosa 1 by drawing on
its existing experience in similar projects in Europe, its regional financing
capabilities in Asia Pacific and a deep understanding of local regulations and
product know-how. Project finance, investment banking, global markets and cash
management were but four of Formosa 1's elements of success. On the last point
alone, it allowed the bank to open 17 accounts for Formosa 1, providing
long-term liquidity to the bank.

Unlike Europe, Asia Pacific is a relative
newcomer to the offshore wind power sector, whether in logistics, dredging or
maintenance. According to Weller, BNP Paribas' major advantage is its European
heritage: "The sector is dominated by European firms. Given that many are BNP
Paribas clients, we have a natural advantage in bridging that gap."

[1] A storm avoided, EIU (March 6, 2019).
[2] Asia Pacific offshore wind capacity to rise 20-fold in next decade, Wood
Mackenzie (October 24, 2018) [3] Australia's first offshore wind power farm – a 2GW project called Star
of the South – remains in the feasibility stage.
[4] Wood Mackenzie, op cit.[5] Japan is seeking to boost offshore wind power generation from 65MW
currently to 0.82GW by 2031, part of its overall effort to increase total wind
power generation to 10GW by that date. See 'Renewable Energy in Asia Pacific: Country Insights', Linklaters, op cit.[6] In January 2019, the government reduced the FIT by 5.7 percent from
2018's NT$5.849/KWh (about US$0.195). Source: EIU, op cit.